Yasheng Huang: Does democracy stifle economic growth?

My topic

is economic growth in China and India.

And the question I want to explore with you

is whether or not

democracy has helped or has hindered

economic growth.

You may say this is not fair,

because I'm selecting two countries

to make a case against democracy.

Actually, exactly the opposite

is what I'm going to do.

I'm going to use these two countries

to make an economic argument for democracy,

rather than against democracy.

The first question there

is why China has grown so much faster

than India.

Over the last 30 years,

in terms of the GDP growth rates,

China has grown at twice the rate of India.

In the last five years,

the two countries have begun to converge somewhat

in economic growth.

But over the last 30 years,

China undoubtedly

has done much better than India.

One simple answer

is China has Shanghai and India has Mumbai.

Look at the skyline of Shanghai.

This is the Pudong area.

The picture on India

is the Dharavi slum of Mumbai

in India.

The idea there

behind these two pictures

is that the Chinese government

can act above rule of law.

It can plan

for the long-term benefits of the country

and in the process,

evict millions of people --

that's just a small technical issue.

Whereas in India, you cannot do that,

because you have to listen to the public.

You're being constrained by the public's opinion.

Even Prime Minister Manmohan Singh

agrees with that view.

In an interview

printed in the financial press of India,

He said that he wants to make Mumbai

another Shanghai.

This is an Oxford-trained economist

steeped in humanistic values,

and yet he agrees

with the high-pressure tactics of Shanghai.

So let me call it the Shanghai model of economic growth,

that emphasizes the following features

for promoting economic development:

infrastructures, airports,

highways, bridges, things like that.

And you need a strong government to do that,

because you cannot respect private property rights.

You cannot be constrained by the public's opinion.

You need also state ownership,

especially of land assets,

in order to build and roll out infrastructures

very quickly.

The implication of that model

is that democracy

is a hindrance for economic growth,

rather than a facilitator of economic growth.

Here's the key question.

Just how important are infrastructures

for economic growth?

This is a key issue.

If you believe that infrastructures are very important for economic growth,

then you would argue a strong government is necessary

to promote growth.

If you believe

that infrastructures are not as important as many people believe,

then you will put less emphasis

on strong government.

So to illustrate that question,

let me give you two countries.

And for the sake of brevity,

I'll call one country Country 1

and the other country Country 2.

Country 1

has a systematic advantage over Country 2

in infrastructures.

Country 1 has more telephones,

and Country 1 has a longer system of railways.

So if I were to ask you,

"Which is China

and which is India,

and which country has grown faster?"

if you believe in the infrastructure view,

then you will say, "Country 1 must be China.

They must have done better, in terms of economic growth.

And Country 2 is possibly India."

Actually the country with more telephones

is the Soviet Union,

and the data referred to 1989.

After the country reported very impressive statistics on telephones,

the country collapsed.

That's not too good.

The picture there is Khrushchev.

I know that in 1989

he no longer ruled the Soviet Union,

but that's the best picture that I can find.

(Laughter)

Telephones, infrastructures

do not guarantee you economic growth.

Country 2, that has fewer telephones,

is China.

Since 1989,

the country has performed at a double-digit rate

every year for the last 20 years.

If you know nothing about China and the Soviet Union

other than the fact about their telephones,

you would have made a poor prediction

about their economic growth

in the next two decades.

Country 1, that has a longer system of railways,

is actually India.

And Country 2 is China.

This is a very little known fact

about the two countries.

Yes, today China has a huge infrastructure advantage

over India.

But for many years,

until the late 1990s,

China had an infrastructure disadvantage

vis-a-vis India.

In developing countries,

the most common mode of transportation

is the railways,

and the British built a lot of railways in India.

India is the smaller of the two countries,

and yet it had a longer system of railways

until the late 1990s.

So clearly,

infrastructure doesn't explain

why China did better before the late 1990s,

as compared with India.

In fact, if you look at the evidence worldwide,

the evidence is more supportive of the view

that the infrastructure are actually the result of economic growth.

The economy grows,

government accumulates more resources,

and the government can invest in infrastructure --

rather than infrastructure being a cause

for economic growth.

And this is clearly the story

of the Chinese economic growth.

Let me look at this question more directly.

Is democracy bad for economic growth?

Now let's turn to two countries,

Country A and Country B.

Country A, in 1990,

had about $300 per capita GDP

as compared with Country B,

which had $460 in per capita GDP.

By 2008,

Country A has surpassed Country B

with $700 per capita GDP

as compared with $650 per capita GDP.

Both countries are in Asia.

If I were to ask you,

"Which are the two Asian countries?

And which one is a democracy?"

you may argue,

"Well, maybe Country A is China

and Country B is India."

In fact, Country A

is democratic India,

and Country B is Pakistan --

the country that has a long period

of military rule.

And it's very common

that we compare India with China.

That's because the two countries

have about the same population size.

But the more natural comparison

is actually between India and Pakistan.

Those two countries are geographically similar.

They have a complicated, but shared common history.

By that comparison,

democracy looks very, very good

in terms of economic growth.

So why do economists fall in love

with authoritarian governments?

One reason is the East Asian Model.

In East Asia,

we have had successful economic growth stories

such as Korea, Taiwan,

Hong Kong and Singapore.

Some of these economies

were ruled by authoritarian governments

in the 60s and 70s

and 1980s.

The problem with that view

is like asking all the winners of lotteries,

"Have you won the lottery?"

And they all tell you, "Yes, we have won the lottery."

And then you draw the conclusion

the odds of winning the lottery

are 100 percent.

The reason is you never go

and bother to ask the losers

who also purchased lottery tickets

and didn't end up winning the prize.

For each of these successful authoritarian governments

in East Asia,

there's a matched failure.

Korea succeeded, North Korea didn't.

Taiwan succeeded, China under Mao Zedong didn't.

Burma didn't succeed.

The Philippines didn't succeed.

If you look at the statistical evidence worldwide,

there's really no support for the idea

that authoritarian governments

hold a systematic edge over democracies

in terms of economic growth.

So the East Asian model

has this massive selection bias --

it is known as selecting on a dependent variable,

something we always tell our students to avoid.

So exactly why did China grow so much faster?

I will take you to the Cultural Revolution,

when China went mad,

and compare that country's performance with India

under Indira Gandhi.

The question there is: Which country did better,

China or India?

China was during the Cultural Revolution.

It turns out even during the Cultural Revolution,

China out-perfomed India

in terms of GDP growth

by an average of about 2.2 percent every year

in terms of per capita GDP.

So that's when China was mad.

The whole country went mad.

It must mean that the country

had something so advantageous to itself in terms of economic growth

to overcome the negative effects

of the Cultural Revolution.

The advantage the country had

was human capital --

nothing else but human capital.

This is the world development index indicator data

in the early 1990s.

And this is the earliest data that I can find.

The adult literacy rate in China

is 77 percent

as compared with 48 percent in India.

The contrast in literacy rates

is especially sharp

between Chinese women and Indian women.

I haven't told you about the definition of literacy.

In China, the definition of literacy

is the ability to read and write

1,500 Chinese characters.

In India, the definition of literacy,

operating definition of literacy,

is the ability, the grand ability,

to write your own name

in whatever language you happen to speak.

The gap between the two countries in terms of literacy

is much more substantial

than the data here indicated.

If you go to other sources of data

such as Human Development Index,

that data series,

go back to the early 1970s,

you see exactly the same contrast.

China held a huge advantage

in terms of human capital

vis-a-vis India.

Life expectancies:

as early as 1965,

China had a huge advantage in life expectancy.

On average, as a Chinese in 1965,

you lived 10 years more

than an average Indian.

So if you have a choice

between being a Chinese and being an Indian,

you would want to become a Chinese

in order to live 10 years longer.

If you made that decision in 1965,

the down side of that

is the next year we have the Cultural Revolution.

So you have to always think carefully

about these decisions.

If you cannot chose your nationality,

then you will want to become an Indian man.

Because, as an Indian man,

you have about two years of life expectancy advantage

vis-a-vis Indian women.

This is an extremely strange fact.

It's very rare among countries

to have this kind of pattern.

It shows the systematic discrimination and biases

in the Indian society

against women.

The good news is, by 2006,

India has closed the gap

between men and women

in terms of life expectancy.

Today, Indian women have a sizable life expectancy edge

over Indian men.

So India is reverting to the normal.

But India still has a lot of work to do

in terms of gender equality.

These are the two pictures

taken of garment factories in Guangdong Province

and garment factories in India.

In China, it's all women.

60 to 80 percent of the workforce in China is women

in the coastal part of the country,

whereas in India, it's all men.

Financial Times printed this picture

of an Indian textile factory

with the title, "India Poised to Overtake China in Textile."

By looking at these two pictures,

I say no, it won't overtake China for a while.

If you look at other East Asian countries,

women there play a hugely important role

in terms of economic take-off --

in terms of creating the manufacturing miracle

associated with East Asia.

India still has a long way to go

to catch up with China.

Then the issue is,

what about the Chinese political system?

You talk about human capital,

you talk about education and public health.

What about the political system?

Isn't it true that the one-party political system

has facilitated economic growth in China?

Actually, the answer is more nuanced and subtle than that.

It depends on a distinction that you draw

between statics of the political system

and the dynamics of the political system.

Statically, China is a one-party system,

authoritarian -- there's no question about it.

Dynamically, it has changed over time

to become less authoritarian and more democratic.

When you explain change --

for example, economic growth;

economic growth is about change --

when you explain change,

you use other things that have changed to explain change,

rather than using the constant to explain change.

Sometimes a fixed effect can explain change,

but a fixed effect only explains changes

in interaction with the things that change.

In terms of the political changes,

they have introduced village elections.

They have increased the security of proprietors.

And they have increased the security

with long-term land leases.

There are also financial reforms in rural China.

There is also a rural entrepreneurial revolution in China.

To me, the pace of political changes

is too slow, too gradual.

And my own view is the country

is going to face some substantial challenges,

because they have not moved further and faster on political reforms.

But nevertheless,

the system has moved in a more liberal direction,

moved in a more democratic direction.

You can apply exactly the same dynamic perspective on India.

In fact, when India was growing

at a Hindu rate of growth --

about one percent, two percent a year --

that was when India was least democratic.

Indira Gandhi declared emergency rule in 1975.

The Indian government owned and operated

all the TV stations.

A little-known fact about India in the 1990s

is that the country

not only has undertaken economic reforms,

the country has also undertaken political reforms

by introducing village self-rule,

privatization of media

and introducing freedom of information acts.

So the dynamic perspective

fits both with China and in India

in terms of the direction.

Why do many people believe

that India is still a growth disaster?

One reason

is they are always comparing India with China.

But China is a superstar

in terms of economic growth.

If you are a NBA player

and you are always being compared to Michael Jordan,

you're going to look not so impressive.

But that doesn't mean

that you're a bad basketball player.

Comparing with a superstar

is the wrong benchmark.

In fact, if you compare India

with the average developing country,

even before the more recent period

of acceleration of Indian growth --

now India is growing between eight and nine percent --

even before this period,

India was ranked fourth in terms of economic growth

among emerging economies.

This is a very impressive record indeed.

Let's think about the future:

the dragon vis-a-vis the elephant.

Which country has the growth momentum?

China, I believe, still has

some of the excellent raw fundamentals --

mostly the social capital,

the public health,

the sense of egalitarianism

that you don't find in India.

But I believe that India has the momentum.

It has the improving fundamentals.

The government has invested in basic education,

has invested in basic health.

I believe the government should do more,

but nevertheless, the direction it is moving in

is the right direction.

India has the right institutional conditions

for economic growth,

whereas China is still struggling

with political reforms.

I believe that the political reforms are a must for China

to maintain its growth.

And it's very important to have political reforms,

to have widely shared benefits of economic growth.

I don't know whether that's going to happen or not,

but I'm an optimist.

Hopefully, five years from now, I'm going to report to TEDGlobal

that political reforms will happen in China.

Thank you very much.

(Applause)